Riding the Wave of Mortgage Digitization

After surviving recent regulatory reforms, mortgage bankers and financial institutions are ready to broaden their emphasis beyond compliance. And not a moment too soon, because the next wave of digital change is moving from the front office to the back office, and players need to respond rapidly.

Much of the talk around digitization focuses on how disruptive it can be. But digitization can also address many of the challenges that mortgage executives face. These include:

Customer experience. Today, how lenders deliver is just as important as what they deliver. Customer preferences are shifting toward self-service, two-way information-sharing and an individualized experience across the home ownership lifecycle. Beyond that, customers are looking to real estate agents, insurance agents, appraisers and other players across the value chain to collaborate and deliver a frictionless lending process. A digital platform can enable this level of delivery without sacrificing loan quality and compliance.

Efficiency and cost. The cost to originate a residential mortgage hit a new peak of $8,957 in the first quarter of 2018. Years of increasing regulatory and investor requirements, coupled with legacy technology, have resulted in an overly manual, time-consuming and error-prone loan origination process. By moving to a mortgage digitization model, lenders can remove processing time, cost and uncertainty from the process while creating a more engaging and predictive customer experience.

Asset quality and risk. In the long shadow of the mortgage crisis, one that caused tens of billions of dollars in losses for investors, little has been done to improve asset quality. The processes, controls and loan origination system platforms that existed before the crisis are largely still in place. A full mortgage digitization process can boost accuracy, trust, integration and transparency, helping to prevent a reoccurrence of massive loan buybacks due to loan quality defects.

Regulatory compliance. To protect customers and investors, lenders must comply with a bevy of regulatory requirements around lending and servicing. Lenders also must develop systems to monitor and control their regulatory compliance. Although these systems don’t have to be digital, mortgage digitization can remove much of the manual work and rework around compliance (disclosure reviews, for instance), which will reducer error rates.

Making the Transition

Despite these advantages, incumbent lenders and servicers don’t have the luxury of starting with a clean slate. They must bridge the gap between the systems and platforms currently powering their business, and the new fintech platforms that evolve rapidly. So how does a lender make the transition to mortgage digitization?

Start by thinking about where your organization wants to be in a few years and the digital capabilities required to get there. Then think about the business value you can achieve with these digital capabilities and offerings. The rest can unfold through the following steps:

Develop a business strategy/plan: A top lender with whom we worked, for example, focused on the purchase market and correspondent channel to navigate a systemic shift from refinance to purchase, driving volume.

Inventory current capabilities: These include both business and technology functionality, which are often delivered via 10-year-old-plus legacy systems that don’t capture adequate data depth, or drive workflows based on rules and exceptions management.

Identify needed/desired capabilities: We worked with a top lender, for example, that set up a dedicated team for processing the cleanest borrowers (i.e., single income, W2, single borrower, Day 1 Certainty) to help it close mortgages in under 20 days.

Define technology requirements: Some of the foundational technology requirements to move to a digital back office include optical character recognition (OCR), rules-based processing and workflow, as well as data aggregation capabilities.

Identify best-of-breed technology platformsthat can provide those capabilities and build what is not available: For instance, up until a few months ago, rules-based workflow capabilities were not available in any loan origination platform so we implemented a business process management layer on top of a client’s core systems to deliver those capabilities.

Review capabilities on an ongoing basis: Fintechs are delivering new capabilities every day (as we saw during the Digital Mortgage Conference 2018). Banks need a governance mechanism to explore and leverage these capabilities on an ongoing basis.

Along the way, try not to get too caught up in whatever technologies appear to be the flavor of the day. Focus on the core capabilities you need to achieve long-term business goals. At the same time, be mindful that the technology capabilities your team identifies must be capable of addressing current and future business demands. For example, it’s better to choose a point-of-sale solution that has digital back-office foundational capabilities, with future plans to expand later into fulfillment, rather than a vendor with a better point-of-sale system but limited future plans.

Laying the Groundwork

All digital initiatives run into stumbling blocks. The good news is that most are predictable and can be managed with careful planning. For instance:

Technology cost spend. Make room in the budget for changes to the technology, team structure, program monitoring and business processes. In addition, be sure to articulate the costs and benefits in terms of the digital business strategy and how technology enables it.

Cultural change. Mortgage digitization can upend staffing models and business processes, alike. Minimize disruption by laying out a roadmap for reconfiguring jobs and reassigning employees in the post-digital organization.

Misalignment with vendor capabilities. Consider the constraints that might emerge among third-party resources, such as title companies and appraisal management firms, which may not support fully digital capabilities.

Above all, bear in mind that the digital wave is not a fad. It’s something that mortgage lenders and servicers must catch and ride if they intend to stay relevant. The result will be an industry retooled for increased compliance, lower origination costs and greater customer engagement.